Just a thought about the (very real) possibilty of zero % interest rates. How, exactly, is that supposed to stimulate the economy? I thought the idea was to get people borrowing, so that they can spend? (Although, even that seems like somewhat of an oxymoron to me).

But what bank is ever going to lend money, even if they have any to spare, without charging interest? Much as we all despise the banks now, even the dimest politician must be able to see that they have to make a profit somehow. If they have no way of making money, they will surely just pack up and disappear? And like it or not, we need banks.

Perhaps it's time now for the people supposedly in charge of saving the world to accept that they haven't got a clue what they're doing, and just stop messing around?

The GBP is falling against the euro not just because of base rates dropping, but because of the outlook for the UK in general. Its the rest of teh world's opinion of Brown and the state of the UK.

The UK has become like the proverbial "King with no clothes". Like the US our economy was largely dependent of ever increasing property prices and retail and financial services. When you borrow and sped for consumption, wether that be for houses or consumer goods or wide screen tv's the end result is poverty not prosperity. Both the UK and the US got rich many years ago by following the opposite philosophy, ie savings ad investment. Not 30 years ago the US was the world's largest producer and subsequently the greatest creditor nation. Now like the UK its broke, having debts so large it couldn't pay them back if it tried.

The solution for the US is now to devalue its way out of trouble, so look for the dollar to fall off a cliff. The same thing will happpen to the UK. The problem is that with all this printed money diluting the beer, there is no free lunch. Since we depend on imports for pretty much everything we buy, just like EU holidays rices for us are going to go thru the roof, just at a time when unempoyment soars. We will get varying degrees of hyperinflation and the powers that be will realise that in comparison the recssion was quite welcome.

If you could print your way out of trouble ( anyone wondered how when rates for savers are dropping, where all the extra money is going to come from?) then Zimbabwe would be the richest country on earth. Its not its one of the poorest and most miserable. The disease was too much and too cheap credit, its seems that those in charge bizarly think the solution is - you guessed it more of the same.

Interestingly the UK's debt measures are now so bad that we would not qualify for Euro entry under the fiscal rules.

TJ, great to hear from you again, your input is always so informative.

Found this article today (source: MoneyMorning), which is more of the same topic:

The Fed’s been busy brandishing its machete again.

We all knew that more US rate cuts were on the way. What we didn’t know until Tuesday evening was that the Federal Reserve would re-write its 75-year old rulebook, and slash official interest rates virtually to zero.

But now that its standard issue ammo’s been used up, America’s central bank only has one real option left - printing money. That’s a huge gamble for the world economy – and bad news for investors...

The cost of borrowing is as low as it can go...

In one way, you’ve got to hand it to the Fed – it didn’t muck about. Chairman Ben Bernanke has had zero interest rates in his gun sights for a while now. Now he’s cashed in on November’s round of economic horror stories – US retail sales fell 1.8% and housing starts hit a new record low – to do the deed.

And for the first time in 75 years, he’s changed the way the Fed sets its ‘target’ rate, from a fixed number to a range of 0% to 0.25%. OK, that was almost a done deal, as fed funds have been trading at around 0.3% for several weeks, but it’s still history in the making and fascinating stuff for monetary historians.

But what does it all mean for the rest of us?

Clearly there aren’t any more interest rate bullets left. As The Telegraph’s Edmund Conway puts it: “For the first time in modern history, interest rates are no longer a major tool. Borrowing costs are as low as they can go without causing bizarre malfunctions in the US financial system”.

...but America's banks still don't want to lend

Of course, there’ve been plenty of “bizarre malfunctions” already, which is why the world economy’s in such a mess. Yet as Dr Irwin Kellner at MarketWatch says, “you can have interest rates at zero and it doesn’t really matter if the banks aren’t lending to individuals, businesses or each other”. And despite all the Fed’s efforts at dangling virtually free money at them, America’s banks still aren’t taking the bait.

Ian Shepherdson at High Frequency Economics pulls no punches: “So here we are: rock bottom - it’s an utterly desolate picture, which will persist for the foreseeable future as the wrenching adjustment in household finances continues.”

This is the snag - ‘de-leveraging’. Private borrowers are being forced by the recession to pay down at least part of the massive debts they built up so recklessly during the boom times. So even if the banks were in lending mode (which they’re not), Americans can’t afford to borrow more anyway. Nor, for that matter, can we Brits. “We have to pay penance for the over-living of the past decade”, says Warren Koontz at Loomis Sayles.

The Fed’s answer: print money like water, electronically, via ”quantitative easing”. Basically the central bank can increase the amount of money splashing around the system by ramping up the size of its balance sheet. And it’s already fired the first shots by increasing its assets (and correspondingly, its liabilities) by some $1.3trn, with the promise of at least another $700bn on the way.

Slicing through all the monetary technicalities – there are enough of those to cure virtually anyone’s insomnia – the bottom line’s very simple. The Fed, and the Bank of England, which is soon likely to join the printing party, can churn out as much extra folding stuff as they like.

Governments will take on more debt to bring back inflation

And even though central banks may not be able to persuade companies and businesses to take on more debt, there’s one group of people who definitely won’t be able to resist – the politicians. And we all know what governments – and yes, Germany’s a very honourable exception – are like when they get the taste for a bit of Keynesian-style borrowing and spending. So presumably, together they can eventually – though we can’t be sure of exactly how long it will take - ‘succeed’ in pushing the price of assets like property and shares, and also the cost of commodities, back up again. In other words, back to inflation again – not just in the States, but worldwide.

The trouble is that it’s a very narrow tightrope. The central banks will need to turn off the money taps again as inflation bites. But by then, the chances are it will be too late. The politicians will have blown all that borrowed cash, and then been voted out of office, leaving the rest of us to pick up a very large bill.

So in the short term, for stock markets, it all adds up to a likely rally, as hopes rise that government largesse will drag economies out of recession. But corporate cash flows will stay under the cosh. S&P warned yesterday that a staggering 20% of all European and UK lower-grade firms are likely to default over the next two years. That’s really bad news for company profits.

And when markets realize that the politicians’ borrow and spend routine was just a short-term fix, down will come share prices again. The bear market still has a long way to run.

And so give up another bit of skill and so gray brain matter to the machines...leaving us headed to the oblivion of dumbness..! I can see my primary school teacher, who terrified us all with spelling drills and tests turning in her grave!!!!

At least i noticed it and corrected it.......that makes me happy that the brain cells are still working!!

And now back to the currency debate...off to queue at the Chinese bank with ridiculous bureaucracy to get RMB changed to Euro, that it will take at least on hour, 3 different queues and about 5 different approval stamps........oh well at least the exchange rate is okay - makes it more worthwhile!!!

Ah, but sometimes when you're typing in a hurry it's easy to make a typo - like TJ always types "teh" instead of "the"! Doesn't mean he's dumb, though - far from it! I agree with you in principle of course, but sometimes technology is a Good Thing.

I think we are all into the realms of 'Brain thinks faster than fingers can type disease' and also 'Fingers don't know where the letters are on the keyboard syndrome'.

I agree that TJ is not dumb, far from it and I have also tended to agree with him in principle on most topics, however I think he is slightly over pessimistic on occasions, then again we can all be from time to time.

Anyways, back on topic with 1.073

Talk about bleak and pessimistic!

PS. I always try and 'proof read' before I click on 'post reply' but sometimes in a flurry of thought and fingers, the brain cells forget and I click.

And why I have added the Google toolbar (with it's spell checker) to Firefox, because the FF dictionary doesn't seem to work on this forum. Shame, because FF also has a natty add-on to enable you to type áéíóú and ñ etc. dead easy if you have a UK keyboard, but again, doesn't seem to work here. But that's a different thread......

TJ pessimistic? I must admit, I thought so too, but most of his "predictions" have turned out to be so uncannily accurate, that one has to wonder.....is TJ really Robert Peston?!

I'll bet there's a fair few who wish they'd followed his advice, and bought gold.

I'll post my thoughts on the exchange rate next year couldn't resist that one, the other half says that we need to get going shortly and unfortuntely I have to drive home so no Seck or wine for me or at least very little, traffico is out in full force this year and no interest in learning what kind of mood there in working New Years Eve and all

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Decided after all I don't like Spanish TV, that is having compared both.

Well fully recovered from New Years Eve, even had my 12 grapes in a can???? so now I'm officially Spanish! anyways

TJ nice to have you back and I am as bearish on the economy as you are, this is going to be a long deep recession. More specifically demographics is compounding matters we're all older and more into savings mode, than in the last two recessions. I'll get to my thoughts on the exchange rate in a moment.

US and UK: both are suffering the effects of an easy money debt fueled borrowing binge (Iceland is a classic example of that) and the deleveraging process will be painful. Just read an article yesterday (can't find the link, Firefox crashed a bunch of times yesterday) about how peoples desire to pay off the mortgages is exasperating the UK housing problem.

Germany and Canada: both are suffering export led recessions, compounding matters is the fact the Conservative government in Canada lit a massive rocket under house prices when they open up zero down and 40 year term mortgages just as the US was going into a recession. This added a huge level of indebtedness to the average Canadian family

Spain: I personally divide Spain into 2 Markets Madrid (and Barcelona) and the coasts. Madrid while massively overpriced does have a strong economy and loads of international companies. The coasts unfortunately and I quote here

This is bad news for the coastal communities because, other than real estate, tourism, and the container port in Algeciars, there is no real economy in southern Spain. Mainly they sell sun, homes, and stuff to fill homes. And judging by the vacancies, more people are choosing sun over shade. This is worse than Miami, the other bubble-busting, sun-drenched prairie of empty homes. At least southern Florida has an attractive tax regime and modern infrastructure that lure new businesses and jobs. Not so southern Spain, where the tax code and infrastructure were both conceived in an era of donkey riding and windmill charging.

And I would add that the exchange rate doesn't help. He does have good news at the end but it's rather limited.

http://news.goldseek.com/GoldSeek/1230678137.php

I get to my thoughts on the exchange rate in the next post.

This message was last edited by Rob in Madrid on 1/1/2009.

This message was last edited by Rob in Madrid on 1/1/2009.

This message was last edited by Rob in Madrid on 1/1/2009.

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Decided after all I don't like Spanish TV, that is having compared both.

At least it hasn't reached parity yet which it lot of people were forecasting it would be before the New Year. As for me I still hope that the ex-rate will bounce back sooner or later, then again at least I'm amongst those that think it will once the truth of the EU economies comes to light.

However what will happen if the BOE does lower interest rates again next week, as there is a hint of them doing so?

whether the boe lowers interest rates is relatively immaterial if the reduced amount is not passed on, currently most problems are being caused not by lenders not lenders as in the residential market in the uk they are, but more in the mainstream banks not lending in the commercial sector as if "projects" arent able to get off the ground then no work filters through and you end up with a reverse pyramid scheme-everyone getting poorer!

Beleive it or not the current margin being made by the banks and lenders is currently higher than it has been for years-added to which they are trying to recoup their losses made predominantly overseas (Iceland & the US) -so the chance of them improving their "chocolate fireguard" stance re UK commercials is about 2/3,s of 3/4,s of sfa!

Me thinks a very tough 12-15 months ahead......yes it will get worse before it gets better -that said it also means that there will be plenty of opportunities for investment that would not normally open up.

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Nobody plans to fail, many fail to plan, sadly the result is the same.

I'm just wondering how the BoE can justify lowering rates any further? Nationwide have already said that they will not be passing on any further rate cuts (their limit is 3% but did go lower) and I am sure others will follow suit. This means that the people the Government are trying to induce to spend by lowering rates will not be benefitting, therefore will not be spending. Once we are over it, how high are they going to have to rise to compensate the Government for all the extra they are "pumping into the economy" as well as the tax rises?

Japan has had 0% rates for some time, apparently, and the US is not far off it, so maybe we have to look to them to understand what's going on, but I must admit I can't figure it out. Clearly banks are not going to pass any more cuts on to borrowers as it will not be worth them lending money at such low rates, whilst savers could potentially face the prospect of paying for the privelege of having their money in a bank (negative interest - it's possible). Although if that happens, surely most savers will opt for the mattress instead, and banks will see a massive outflow of cash - just when they're supposed to be lending more. Surely the only effect will be a further devaluation of the Pound? Imported goods (which means pretty much everything, since Britain doesn't make anything) will become more expensive as a result, and everyone in the UK will become poorer. Or have I got that all wrong?